The spillover effects among financial stress, investor sentiment, and GCC stock markets: evidence under the bearish and bullish market states

Abstract

ABSTRACT This study delves into an exploration of volatility spillover between financial stress, investor sentiment, and stock market index returns in the Gulf Cooperation Council (GCC) countries using the DCC-GARCH, wavelet coherence, and BEKK-GARCH models. A robustness check, applying Diebold and Yilmaz’s (2012, 2014) methodology, verifies network measures across markets. Significant patterns in financial stress index were observed during crises, with strong co-movement between financial stress, investor sentiment, and stock returns, especially during COVID-19 pandemic. Volatility transmission from stock returns to investor sentiment and the financial stress index was notable in some markets. Additionally, we found a significant volatility transmission from the financial stress index to market returns during periods of bearish stress in Bahrain and Kuwait and bullish stress across all countries. These findings offer insights for investors and fund managers optimizing portfolios and managing risk exposure.